There are several factors contributing to a changing landscape for retirement plans in 2024. SECURE Act 2.0 made a number of changes effective in 2024. The IRS released cost-of-living adjustments to various retirement plan limits. And employees’ financial security concerns, coupled with a labor shortage, have driven more small businesses to consider their retirement plan offerings.
New rules from SECURE Act 2.0
While SECURE Act 2.0 became law on December 29, 2022, a number of the rules have not yet become effective; they will be effective in 2024.
Starter 401(k)s. Employers that haven’t had a retirement plan in the past 3 years can use a “starter 401(k).” The plan is funded entirely with employee elective deferrals at a rate of 3% to 15% of compensation, up to a maximum contribution of $6,000, plus $1,000 catch-up; no employer contributions are permitted. Eligible employees must be automatically enrolled, although they can opt out. Note: Implementing a starter 401(k) means employers won’t have to enroll employees in state-run plans for private sector employers (more than half a dozen states have such plans in place and, in some of these, employers can be penalized for not enrolling employees).
Financial backstops. Plans can, but are not required, to offer certain ways for employees to get quick cash from the plan:
- Emergency savings accounts for non-highly compensated employees. Such participants can be allowed to make Roth contributions to these accounts until the account balance reaches $2,500.
- Personal emergency expense distributions up to $1,000. These are penalty free for those under age 59½ and the distributions can be recontributed within 3 years.
Contributions:
- Employers can make matching contributions based on student loan repayments.
- SIMPLIE IRAs can allow employers to make additional contributions (in addition to required matching contributions) to each employee in a uniform manner, provided that the contribution does not exceed the lesser of 10% of compensation or $5,000.
- Elective deferral and catch-up contributions for SIMPLE IRAs for those age 50 and older in a plan by an employer with no more than 25 employees are increased by 10%. An employer with 26 to 100 employees can provide higher deferral limits, but only if the employer either provides a 4% matching contribution or a 3% employer contribution.
Distributions and administrative changes:
- Required minimum distributions (RMDs) are due to participants attaining 73 in 2024. However, the plan may permit deferral of RMDs until retirement for those who are not more-than-5% owners.
- Penalty-free withdrawals are permitted for domestic abuse survivors up to the lesser of $10,000 or 50% of the account balance. The participant can self-certify eligibility for this and can recontribute the distribution within 3 years.
- Employers can adopt a plan up to due date of the employer’s return (including extensions)
- The threshold for cash-outs of inactive participants increased to $7,000
Note: A requirement that those earning more than $145,000 would be limited in making catch-up contributions to designated Roth accounts beginning in 2024 has been delayed to 2026.
COLAs for retirement plans
The IRS announced cost-of-living increases to various retirement plan limits or thresholds for 2024. Due to significant inflation, many—but not all—of the numbers are higher. Here are some of the changes that affect employer plans:
- Limit on compensation taken into account in figuring contributions and benefits: $345,000 (up from $330,000)
- Contribution limit for profit-sharing and SEPs: $69,000 (up from $66,000)
- Benefit limit for defined benefit (pension) plans: $275,000 (up from $265,000)
- 401(k) plan elective deferrals: $23,000 (up from $22,500), with catch-up contributions at $7,500 (unchanged)
- SIMPLE IRA elective deferrals: $16,000 (up from $15,500), with catch-up contributions at $3,500 (unchanged)
The Pension Benefit Guarantee Corporation (PBGC) posted premium rates for 2024 that defined benefit (pension) plans must pay. The per-participant rate for the flat-rate premium is $101 (up from $96 in 2023). The variable-rate premium is $52 per participant (this rate is no longer subject to indexing so it’s the same as in 2023) for the rate per $1,000 of unfunded vested benefits, with a cap of $686 (up from $652).
Staffing considerations
Finding and keeping employees continues to be a big concern for many businesses. According to last year’s Global Benefits Attitudes Survey, 60% of employees said that their employer’s retirement plan was an important reason to remain at a company. Offering a retirement plan is especially important for small employers since most large companies have one.
Final thought
So many rules, so many options. What’s a small business to do when it comes to a retirement plan? The best idea is to start a discussion with your CPA or other tax adviser, or with your payroll company if you work with one. Be sure to explore tax credits that may reduce the cost of setting up and funding a plan if you are eligible for them.
